Sunday, July 24, 2011

Means Testing Entitlements

I’ve been thinking about this issue more since Friday’s duel to the death discussion with David Brooks, and have come to the conclusion that this is an even worse idea, on pure policy grounds, than even most liberals realize.

The usual argument against means-testing — which is entirely valid — is that it (a) doesn’t save much money and (b) messes up a relatively simple program. The reason it can’t save much money is that there are relatively few people rich enough to be able to afford major cost-sharing. Meanwhile, the good thing about Medicare, as with Social Security, is precisely that it doesn’t depend on your personal financial status — you just get it. Means-testing would turn it into something much more intrusive, like Medicaid.

But there’s a further point I haven’t seen emphasized: if you want the well-off to pay more, it’s just better to raise their taxes.

Wait, you say: won’t raising taxes reduce incentives to work and create wealth? Yes, it will (although such effects are greatly exaggerated in our political discourse.) But means-testing benefits does the same thing. Conservative economists love to point out that means-tested programs like food stamps in effect create high marginal tax rates for low-income families, since they lose benefits if they work and earn more. Well, means-testing Medicare would do the same thing: your reward for a life of hard work and accumulation will be higher copays and deductibles.

So what’s the difference between means-testing and just collecting a bit more taxes? The answer is, class warfare — not between the rich and poor, but between the filthy rich and the merely affluent. For a tax rise would get a significant amount of revenue from the very, very rich (because they have so much money), while means-testing would end up imposing the same burden on $400,000 a year working Wall Street stiffs that it imposes on billion-a-year hedge fund managers.

What we need is actual control of health costs. Means-testing of Medicare is just a badly designed, unfair form of taxation.

Krugman has overlooked on key argument against means testing. This came up in the late 1980s/early 1990s when the right wing Conservatives took power in Canada. They wanted to means test our pension plan. But this argument helped stop this rightward slide:

If you means test a social program, then the rich who will have to pay for the program will see the program as a burden and agitate to end the program. Only a universal program ensures no social group has a motive to cut back or shut down the program as "too expensive".

Also, Krugman doesn't address the administrative expenses of policing a system where some get the service for free and others have to pay. Those that have to pay have an incentive to try to trick the system into giving them free service and you now have a policing headache to find the cheats.

Universal benefits are simple to understand, simple to police, and tend to keep the society cohesive.